Phonofile Insights is a series of in-depth interviews with prominent indie music industry thinkers, focusing on relevant subjects for the industry of recorded music.

Charles Caldas interviewed by Eamonn Forde, reports editor at Music Ally and freelance music business writer.

Charles Caldas has been CEO of Merlin, the global digital rights agency for independent labels, since it was established in 2007. With so much rapid change happening in the music industry, we invited Charles to outline both the challenges he faces and the opportunities he sees today, to explain how he feels the indies must work around accelerating consolidation and hear why he believes that streaming is the future – despite what Thom Yorke might say.

Merlin’s remit is to represent and negotiate on behalf of indies globally, acting like a “fourth major” so they get the best possible deals from the multitude of digital services that are either in the market or launching soon.

Caldas has “worked in the independent sector my entire professional life”, starting in Shock, an independent label and distributor in his native Australia, in 1989. “Before that I was a failed musician in indie bands,” he admits. “I never quite got there as I was always a bit too lazy to be in a proper band!” In the early 2000s he became fascinated by the potential of digital for indie distribution. “But I was in Australia which was a market that didn’t really adopt digital stores until much later than that,” he says. This was at a time when digital was causing huge upheaval in the industry, with many in the industry regarding Napster and Kazaa as portents of doom. “I saw that whole time a little bit differently to how the mainstream did,” he explains. “I was interested in the possibilities of those kind of technologies rather than thinking they should be shut down.” He moved to the UK in 2007 to set up Merlin because the indies were increasingly “frustrated they were getting offered deals they sensed were worse than what the major labels were getting”. With distribution in disruptive times in his DNA (“I felt I understood the dynamic of both labels and distributors”), he is charged with representing the indies at a crucial point in their history.

Three years before Merlin was set up, Sony and BMG merged and last year Universal swallowed up EMI while Warner took over Parlophone. What does this age of mega-consolidation mean for the indies?
We were born in that environment – in the initial consolidation of the market – so the response of Merlin in consolidating a whole range of global interests into what we do in some ways echoed that. We have established a much more efficient way for digital services to get to independent content. In the physical market, the ability to control media like TV and radio as well as retail was the way you created hits. And that’s what the major labels are very good at. There were a limited amount of slots in those stores that everyone was fighting for. The immediate effect of the launch of iTunes was that it removed that rack space limitation so that all of a sudden you had unlimited space and you could offer customers everything. In streaming, that democratisation of rack space that happened with download stores has now become a democratisation of entry points. If you are clever and can engage your fans – or your potential fans – in direct ways like social media, you can get people to your music a lot easier than you could in the physical world.

You have claimed that Nielsen’s market share stats in the US are being “gamed” by the majors. How does that work and what can be done about it?
Whilst our dynamic is a growth one in terms of market share, the majors are finding it more challenging the more digital the market gets. They have built business around having these inbuilt market advantages. The way to counteract this loss of market share is to increase your market share. And the way we see the majors increasing their market share at the moment is by acquiring independent distribution rights through initiatives like RED, Caroline and ADA and acquiring independent distributors. Hence Sony Music Entertainment buying into The Orchard/IODA [it owns 50% and has an option to acquire the other 50% at a later date] and Universal Music Group having a share in INgrooves. The market share of these distribution companies get bundled into the parent company’s share. The danger in that land grab is if you measure value in the marketplace based on old world measures such as physical market share rather than how the market actually looks. In the USA, Nielsen figures show you the distribution figures for what the major labels actually distribute in the marketplace. But they don’t include the shares on digital streaming services, whereindependents perform much better. The majors want to use the numbers that make it look best for them. If we then look at the licensing of a new digital service that comes to market, the real digital market – the way we see it – looks much more like the chart that Billboard recently published showing share by owner than the Nielsen chart. And increasingly independents control their own digital and their own streaming business even if they use a major distributor for physical sales. If the value at the front of these deals is apportioned according to the Nielsen-type analysis – which I think is out-dated and irrelevant when it comes to the streaming platforms – you have this misalignment of value that looks like the major labels control much more of the market than they actually do and what we actually see in day-to-day streaming services. With consolidation in three majors, the more power there is in fewer hands the more incentivised those three labels that are left will be to game the system to extract that additional value because it gives them a competitive advantage in the marketplace.

The Nordics are trailblazers in streaming adoption and turning around broken markets. Can the developments in Norway and Sweden happen elsewhere? The Nordics are the gold standard of the streaming space, but the interesting thing with Sweden and Norway is that a few things happened there that don’t necessarily apply in every territory. Sweden never had a dominant download culture. It went from physical to piracy and recorded music in that market took an enormous dive. Swedish consumers never really embraced downloads so their attention in terms of digital music went straight to streaming. The other thing that happened was that Telia really doubled down on music in those territories because they had a very competitive telco market. We have also seen this in the Netherlands and Belgium. Spotify, or any comprehensive streaming service bundled on a phone is a very powerful customer acquisition tool. In the Nordics, the retention of customers from free trials is enormously high. That proves if you give the customers the product and allow them to live with it for a year, they find it really attractive. Predicting that the rest of the world is going to look like Norway and Sweden is potentially a bit of a stretch – but they give us strong clues that if you properly engage the consumers and they like the product and use it, they will want to keep it.

Google/YouTube are accused on not paying high royalties or protecting IP – but they do give reach and analytics that record labels can’t do without. Can this disparity be reconciled? The dynamic of YouTube as a promotional platform is something I totally get – people use it and it has enormous reach and is very powerful. At the same time, I don’t think people consider that it is a monetised service and it is paying, from our experience, less than the streaming platforms are. YouTube can be fantastic at exposing your artists but experience shows it is not as good at generating revenue around that. YouTube pays – per-stream and per-user – less than any of the subscription services. What I don’t get is that people are happy to criticise and attack the paid streaming platforms who are paying at the top end of the scale and yet seem to be willing to monetise YouTube at a much, much lower level. As we go on in time, what we want to see is a healthy and competitive music marketplace where there are established market rates for the use of our music under various functionalities. One of the things I get frustrated talking to independent labels about are the received wisdom and knee-jerk reactions about [erroneous payment rates]. No one seems to consider that on Soundcloud, with massive usage you earn nothing, or that rates on YouTube are even lower, and how different is that to what they would have earned on Rdio or Sony Music Unlimited.

The most vocal opponents of streaming have recently come from the indie sector – with Ministry Of Sound suing Spotify over playlists and Thom Yorke attacking Spotify payments [Atoms For Peace are signed to XL Recordings]. How can you convince them streaming is not the enemy? The Ministry Of Sound one is a unique situation. Ministry owns very few of the tracks it puts out on its CDs. It is not just a record label, it’s also a brand [although they have signed London Grammar, Example and Wretch 32 among others]. It is very successful at putting all sorts of music underneath its umbrella. The streaming world directly challenges that [compilations] model – where curation becomes democratised. So the challenge for a business like Ministry’s is to grow the company to adapt into the modern space. A lot of electronic labels have been very successful in the streaming space, but they all have very different business models and are much more driven by having artists in-house. Ministry is building that part of the business and being very successful at it. They are a smart, mature and innovative enough company to be able to navigate all this as time goes by. With the Thom Yorke debate, I don’t want to show disrespect to an artist as he is a very intelligent man and very thoughtful about the value of his own work – as we all should be. But we need to look at what a healthy streaming model looks like. You could pull out one royalty statement from one country for publishing rights when there were only 500 Spotify users there and it would look terrible. If you take the same snapshot of the same territory 12 months later, it will look an awful lot better than the first one did. Take another one a year down the track and that is going to look better again. If we look at Merlin’s business, 2013 was more than double what 2012 was – which was more than double on 2011. The challenge for all of us is to get that market to scale as quickly as possible because then it becomes a primary revenue stream and, in the context of the market, you are getting properly compensated as an artist. There are other elements to Thom Yorke’s debate about how music is presented and how it is being unbundled and commodified – and that is a whole other philosophical debate. Yet if we see one part of the market growing and see that as an integral part in the future, the question is how we get that to scale as quickly as possible. I don’t think this is a market about individual streams any more. This is a market about how me monetise consumers. What is a person worth to us a year?

Is $10/€10/£10 a month a mainstream price point for subscription streaming or will it have to go down? Variable pricing has always existed in the music industry. I would be shocked if, in three years’ time, there is not pricing variability around a whole range of factors – be that sound quality, curation or specialisation. There is an opportunity to go up the value chain as well as down the value chain, depending on how innovative and how attractive the product is. I don’t think we have seen enough innovation in that space. There are opportunities here around curation, specialisation and sound quality that will be thought up. WiMP is already doing that with WiMP HiFi [doubling the price for lossless audio]. We shouldn’t just be thinking about how we can make music cheaper; we should also be thinking about ways we can add value to it so that people pay more for experiences and quality.